DSG International yesterday blamed disappointing Christmas sales at its core Currys chain on intense competition from retailers such as Marks & Spencer moving into electrical goods and signalled a partial retreat from UK high streets over the next five years.

The City interpreted DSG's poor trading update, which was issued alongside interim results, as a profit warning and wiped 12 per cent off its share price. The stock was the biggest faller in the FTSE 100, closing down 23.25p at 171p.

Analysts cut about 9 per cent off their profit forecasts, meaning that year-on-year profit growth is likely to remain flat despite the boost to the sector from the World Cup, which prompted a rush on flat-panel television sets. The consensus forecast fell to about £305m.

A severe slump in sales at DSG's Italian electricals chain UniEuro, which it bought three years ago for about £300m, also contributed to the profit downgrades. Despite seeking to protect profit margins at the expense of sales, the group also said its gross margins fell by 70 basis points over its peak trading period.

At Currys, which includes the former Dixons high street stores that were rebranded Currys.digital after the brand's migration online, like-for-like sales rose by just 1 per cent during the eight weeks to 6 January. This followed a 5 per cent rise on the same basis in the group's first half.

A "very disappointing four weeks" in the run-up to Christmas were to blame, according to John Clare, the chief executive. "We didn't fully understand why. We're not sure we do now," he admitted. His best guess was that the march by rivals from the grocers and clothing retail market into electronic gifts had hit sales, which are skewed towards big-ticket items such as televisions. He said that more shoppers than normal had waited until the sales to buy big-ticket goods, resulting in Boxing Day being the group's busiest ever day and sales in the post-Christmas sales week hitting a record.

Despite insisting he had "no concerns" about rebranding the former Dixons stores, which saved the group money, he admitted that the future of its 200-odd high street stores was in doubt. He said the group would not be renewing the leases on its Currys.digital stores because of the upward pressure on rents.

"It's not a policy decision to move away from the high street," Mr Clare said. "Moving away is a consequence of high rents."

Analysts believe competition in the electricals sector will intensify as DSG's rivals push harder into that space. M&S, which started selling flat-panel televisions for the first time in the run-up to Christmas, is expected to announce it will roll out electricals sections to the rest of its 360 stores after a successful trial.

Mr Clare said the decline in "gift market categories ... in no way reflects the opportunities for Currys [because] they are not Currys' core business". Pulling back from the high street would leave Currys with its core out-of-town outlets.

The group said underlying sales at its PC World chain in the UK rose by 5 per cent during the peak trading period, reflecting growth in demand for laptops. It expects the launch of Microsoft's new operating programme Vista later this month to drive sales of more expensive PCs.

Total group sales rose by 14 per cent during the eight-week trading period and by 3 per cent on an underlying basis. It took 10 per cent of its sales online, up from 3 per cent a year ago. This reflected the success of its decision to migrate its Dixons brand online, it said.

DSG warned that problems with its Italian business and its French computing chain meant it would miss profit expectations in those markets. Mr Clare said he had "every confidence" that efforts to turn round UniEuro would work this year.

The group also said it was making a £50m cash injection into its £196m pension hole. Mr Clare said DSG had "no intention" of following WH Smith, which announced last week it was closing its final-salary scheme to existing members.